Hotel Management Agreements: Best Practices

Hotel Management Agreements: Best Practices


When I talk about hotel management agreements I typically would like to start out
with the worst case scenario because that is what I see when an issue with
the hotel management typically walks in my door or, whether it’s the problem, or a
hotel owner or manager would like my help in negotiating and finalizing the
hotel management agreement, I usually like to frame it from the point of what’s the
worst case scenario that can happen. And in my perspective the worst case is when
the hotel owner terminates the hotel management agreement. Typically, citing lack of
fiscal responsibility on the part of the hotel management company or hotel
manager, the owner may claim monetary damages for alleged financial losses and,
in the worst case, the owner may allege gross negligence, wrongful acts or fraud
on the behalf of the hotel management company. And those are all allegations in
an effort to terminate the agreement and avoid paying compensation to the hotel
management company. So to avoid that situation it is important for hotel
management companies to comply with their hotel management agreements.
Typically, the most important portions of a hotel management agreement are the
provisions that deal with an annual operating budget and a capital additions
budget. An annual operating budget there will be monthly P&L estimates and
departmental budgets, with which the hotel manager needs to comply, and there
will be capital additions budgets that provide estimated capital expenditures
for the year, categorized by departments and providing refurbishing details on
replacing furniture, fixtures and equipment. It is important to get the
hotel owner’s consent if you’re going to exceed those budgets. With respect to
hotel management agreements, another important aspect is to report to the owner so
financial reporting provisions are extremely important for hotel management
companies to comply with and make sure that they communicate monthly and
annually to the owner as to the financial status of the hotel property.
There are monthly reports with balance sheets, detailed P&L statements and management fee expenses that need to be provided to the owner on a monthly basis. And then at
the end of the year you’ll have annual reports to the hotel owner providing an
annual balance sheet, detailed P&L statement and also reconciling the
management fees and expenses for the year. Now these hotel manager agreements
typically cite compliance standards with which you’ll be reporting
financially. Often they’re citing general generally accepted accounting principles,
or “GAAP” compliance. Often they’ll cite the uniform system of accounts for the
lodging industry, the most recent addition. there’ll be provisions for
audits. There may be provisions that talk about what the industry standard is to
deviate from your budgets. And finally it’s in the best case for both parties
to have force majeure provisions so if there are things that are out of hotel
management companies control there are exceptions for expenses that may happen
because of, say, an earthquake, or a fire or some other event that’s out of the
hotel management company’s control where the costs end up being higher than
expected. As I mentioned earlier in my presentation, obtaining the owners
approval prior to going over a certain dollar threshold is extremely important
to prevent disputes with the owner or potential termination of the hotel
management agreement. It’s important to get approval for corporate charges. It’s
also important to get approval for any overruns of allocated charges by
department or otherwise. Another very risky area are capital projects. If
you’re renovating your hotel, expanding your hotel, building a new hotel, these
are high budget risks where you’re dealing with very large numbers in
capital improvement projects or new builds
and you need to make sure that you do whatever you can to finish the project
within budget or otherwise have contingency plans if you’re going out of
budget. I often help hotel companies with their development and construction
contracts and in those contracts we often have very detailed exhibits with
plans and specifications detailing what will be built as well as a very
detailed budget providing in lots of different detail and line-item
spreadsheets exactly how much the expected costs will be for that hotel
improvement, that project, with contingencies built in for some overrun
fluctuation. And finally in those capital improvement projects, in the contracts,
we’ll make sure we have a project schedule so even if the the cost of the
projects are within budget it’s often time the delay in a project that makes
the labor more expensive than anticipated and so it’s very important
to keep the project schedule as part of the contract to make sure the contract
and the construction project is done within time. Sometimes there’s some grace periods built-in for reasonableness but otherwise you need the incentives there
to make sure the project is done on time and obviously on budget. In addition,
there are issues of franchise compliance if you have a franchise agreement with a
certain flag you’ll need approval from the franchisor as to capital projects
and budgets and and the type of finishes that you’re having. And finally, you may
have separate technical agreements with various consultants as well as the
contractor and finishing those projects and those are agreements that you should
have reviewed by an attorney experienced in those areas to make sure those are
done properly and to prevent costs from being beyond the budget. That’s hotel
management agreements in a nutshell. I’m Sandip Soli with the Real Property
Law Group. Please contact me if you have any questions. Thank you.

Leave a Reply

Your email address will not be published. Required fields are marked *